As more data releases point to a slowdown in consumer and business spending activity, the road ahead for the U.S. economy could be rocky. So what are the implications for U.S. stock investors?
When economic uncertainty rises, it can be a good idea to seek out businesses that have demonstrated the ability to generate relatively stable growth regardless of the environment. Granted, virtually every company is impacted by a broad slowdown, but some are better equipped to handle it than others on account of their strong fundamentals and leadership.
Ok, but how do we quantify stable growth?
Rather than reinvent the wheel, S&P Capital IQ’s Growth Stability score is a good metric to lean on. It combines various fundamental data points that reflect how stable a company’s cash flow and earnings growth have been over time. The result is a sector-relative 1 through 100 score with 100 being the best.
Let’s look at a few of the companies with the most stable growth profiles in the energy, materials, and technology sectors, respectively.
Which Oil Refiners Have the Most Stable Growth?
As the largest independent petroleum refiner in the world, Valero Energy Corporation (NYSE:VLO) processes a ton of crude oil—and generates a ton of cash flow. As its 15 refineries and 11 ethanol plants have recovered from the pandemic, profitability has returned to 2019 levels and beyond. Thanks to a second-quarter surge in oil prices, Valero is on pace to generate earnings per share (EPS) of around $20 this year.
In the quarters ahead, however, crude prices and profits are expected to moderate and be more evenly distributed by quarter. This would be more akin to how Valero has performed historically, which has earned it a 99 growth stability rating from S&P Capital IQ. Valero, along with peers Marathon Petroleum and PBF Energy, hold the energy sector’s highest scores—a reflection of relatively constant demand in the refining space.
Even in a shaky economy, Valero should benefit from an increased need for gasoline, diesel, and jet fuel as travel and other industries continue to rebound. And even if oil prices slide, expanding operating margins should drive the kind of cash flow growth investors have come to expect.
Does Freeport-McMoRan have a Good Growth Outlook?
Freeport-McMoRan Inc. (NYSE:FCX) has one of the best growth stability scores in the materials sector with a 96. Lately, the Phoenix-based copper miner is the beneficiary of higher metal prices, including those of gold and molybdenum—its other main assets. Yet even in weak commodity price environments, the company has a strong track record of producing growth thanks to its disinclined cost management framework and healthy balance sheet.
Over the last five years, Freeport’s annualized cash flow growth of 17.8% has outpaced mining industry peers. This has had much to do with above-industry operating margins and a strong liquidity position that enable it to plow more money back into the business and reward shareholders. After recently bumping its quarterly dividend to $0.60 per share, the stock presently offers a 2% forward yield.
While Freeport is not immune to cost inflation pressures in the form of higher energy and freight expenses, it is in a better position than most miners to weather an economic storm. Plus, any near-term weakness in demand should be overshadowed by sustained long-term demand for copper as auto manufacturers increasingly rely on the metal to advance their electric vehicle goals.
What is a Semiconductor Company With Stable Growth?
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) currently has a 96 growth stability score from S&P Capital IQ, one of the best in the volatile semiconductor space. To have some of the most stable growth in one of the market’s most unpredictable industries is saying something. Chipmakers have been immensely challenged by shortages during the economic reopening, a challenge Taiwan Semi has responded to by outlining aggressive capacity expansion plans.
In the years leading up to the pandemic, the company was growing revenue and earnings in the 4% to 5% range and increasing its dividend payout along the way. The unusual economic shutdown and pent-up demand since have made for some unusually high growth rates over the last couple of years, but things are starting to stabilize again. Cash flow is normalizing, and Taiwan Semi is cautiously maintaining capital expenditure levels that don’t outweigh the cash it is bringing in. This has the company back to tracking at roughly a 1.3 cash flow to capex ratio, a metric that confirms its sense of fiscal responsibility and stable growth profile.
After delivering 17% earnings growth last year, analysts are forecasting an acceleration in profit growth this year as supply conditions improve and demand stays strong. At a time when other semiconductor companies are paring back their growth outlooks, Taiwan Semi management just raised its full year sales growth guidance from 17.5% at the midpoint to more than 20%. Steady ongoing order flow from smartphone, auto, high-performance computing, and Internet-of-Things (IoT) is expected to drive some well balanced growth.
Before you consider Valero Energy, you'll want to hear this.
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